NEW YORK — The New York Federal Reserve (NY Fed) has restricted its eligibility criteria for its reverse-repurchase program (RRP) in a move that may prevent stablecoin issuer Circle from accessing the coveted Federal Reserve facility.
The NY Fed’s press release indicated that funds organized for a single beneficial owner, registered as 2a-7 funds with the Securities and Exchange Commission (SEC), would typically be ineligible under the new regulations.
The Circle Reserve Fund, which is managed by investment management behemoth BlackRock Advisors, seems to fall into this category.
The RRP permits designated counterparties such as banks and money market funds to lend to the Federal Reserve overnight at a fixed rate, currently 4.8%.
Though the facility was originally designed as a stabilizing mechanism for the financial system, it has become an appealing means of earning high yields with minimal counterparty risk.
The funds involved in the program currently exceed $2.3 trillion.
If Circle’s USDC gains access to the RRP, it could potentially destabilize the financial system, according to the Bank Policy Institute, a key advocacy group for U.S. banks, which stated in January that it would create “a stablecoin essentially backed by the Fed.”
“The Fed updated the eligibility rules for the ONRRP facility in ways that could deny access to stablecoins,” Nick Timiraos, chief economic correspondent of The Wall Street Journal, tweeted.
Circle, which issued the USDC stablecoin worth $31 billion, currently holds approximately $25 billion of reserves in short-term U.S. Treasury bills via the Circle Reserve Fund, a bespoke fund managed by BlackRock available exclusively to Circle.
The fund was registered as a “2a-7” government money market fund, according to Circle’s earlier press release and a SEC filing about the fund.
In an interview with CoinDesk in November, Circle’s chief financial officer, Jeremy Fox-Geen, stated that the company’s objective for the fund was to obtain access, via BlackRock, to the Fed’s RRP.
This access would permit Circle to transfer USDC’s remaining cash reserves from partner banks to the fund under a Fed account, Fox-Geen added.
Last month, the USDC faced a crisis when its banking partner, Silicon Valley Bank, suddenly collapsed.
Some $3.3 billion of USDC’s cash reserve held at SVB became inaccessible for several days, causing ripples across the stablecoin market until the government bailed out depositors in excess of the Federal Deposit Insurance Corporation’s deposit insurance limit.
Circle has since taken steps “to reduce risk from the banking system” and now primarily holds its cash reserves at BNY Mellon, a globally important bank, the firm stated.